U.S. Supreme Court Establishes State-of-Mind Requirement for Inducing Infringement Liability

Today, the U.S. Supreme Court issued its decision in Global-Tech Appliances, Inc., et al. v. SEB S.A., No. 10-6 (2011), holding that to prove inducing infringement under 35 U.S.C. § 271(b) a plaintiff must prove that the infringer had knowledge that “the induced acts constitute patent infringement.” The Court also held that this knowledge requirement can be satisfied by evidence of “willful blindness.”

Morgan Lewis represented SEB in this case.

On the facts of the case, SEB had developed an innovative method to produce household deep fryers and received a U.S. patent for this invention. A foreign competitor, Global-Tech Appliances, purchased one of SEB’s fryers in Hong Kong where it would not have patent markings, reverse-engineered SEB’s fryer, and then copied the SEB fryer’s unique technology. Global-Tech hired a patent attorney to conduct a patent search, but deliberately chose not to tell that attorney that its fryer was a copy of another company’s commercially successful fryer. The attorney did not locate SEB’s patent in its patent search. Global-Tech then sold its fryers to U.S. companies to sell within the United States. SEB sued Global-Tech for patent infringement and inducing infringement, and the jury found for SEB on all counts.

On appeal, Global-Tech challenged the finding on inducing infringement liability due to a lack of evidence of its actual knowledge of SEB’s patent. Section 271(b) provides that “[w]hoever actively induces infringement of a patent shall be liable as an infringer.” Over the last two decades, the Federal Circuit has offered various formulations of what mental-state requirement must be proven to establish liability under § 271(b). On appeal in this case, the Federal Circuit held that the mental-state requirement could be satisfied by evidence of “deliberate indifference of a known risk that a patent exists” and that Global-Tech’s actions constituted such deliberate indifference.

The Supreme Court rejected the Federal Circuit’s analysis but nonetheless affirmed the judgment. The Court held that inducing infringement liability under § 271(b) requires evidence that the infringer had knowledge that “the induced acts constitute patent infringement.” Adopting the argument advanced by SEB, the Court held that this knowledge requirement could be satisfied by evidence of “willful blindness.” After analyzing the record, the Court held that the judgment for SEB could be affirmed based on the evidence of Global-Tech’s willful blindness. The Court focused on Global-Tech’s decision to purchase the fryer to reverse-engineer it overseas (where it would not have U.S. patent markings) and then to deliberately withhold from its attorney the basic information that its fryer was a copy of SEB’s fryer.

This decision clears up an issue of long-standing confusion in the Federal Circuit as to the mental-state requirement of § 271(b). The Court’s explication of the standard should be welcome news to both innovators and holders of patents. The decision prevents frivolous claims of inducing infringement by requiring proof of knowledge of infringement. At the same time, it allows companies to protect their intellectual property rights against those companies that willfully blind themselves to a lawful patent in order to copy a commercially successful product. Corporations hiring attorneys to conduct patent searches should be sure to disclose to their attorneys any products copied or relied upon in developing a new technology.

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Federal Judge Orders California Waste Hauling Firm to Reinstate Two Drivers and Cease Anti-Union Activity

At the request of the National Labor Relations Board, a U.S. District Judge this week ordered a San Jose area waste hauling company to offer reinstatement to two drivers and restore full assignments to other drivers who had expressed support for a union during an organizing campaign.

In issuing the temporary injunction May 17, Judge Jeremy Fogel of the U.S. District Court in San Jose said the NLRB’s Office of General Counsel was likely to win its case against the company, OS Transport LLC, and that the employees would experience irreparable harm if an order did not issue immediately.

The decision stated that the agency “has made a substantial showing that (the company) engaged in serious unfair labor practices, including the termination of a lead organizer and another Union supporter, retaliation against Union efforts in the form of unfavorable assignments, threats to Union supporters, and promises of improved treatment of employees who disavow the Union. These actions appear calculated to chill the employees’ rights to the point that the organizing campaign could be defeated before the Board issues its final determination.”

The dispute began in January 2010, when drivers were told they must incorporate as individual corporate entities in order to continue working. The drivers, who spoke primarily Spanish, were later told to sign incorporation applications filled out in English, or risk being fired. During this period, some drivers contacted the Teamsters Union, Local 350, and signed a joint letter of protest to the company. The union supporters were reassigned to less lucrative routes, and two were later fired.

The union filed charges with the NLRB Regional Office in Oakland and, following investigations, complaints were issued in December 2010 and February 2011 alleging multiple violations of federal labor law. The case was heard by an administrative law judge early this year, but a decision has not yet issued.

Under the injunction, the company owner must read the full order to employees in English and Spanish, or be present when the full order is read by an agent of the NLRB. In addition, the company must provide full names and addresses of employees to union representatives.

Spectrum Healthcare Settles Charges with NLRB and Union, Agrees to Reinstate Employees with Backpay and Sign Collective Bargaining Agreement

A Connecticut nursing home operator has agreed to settle a National Labor Relations Board case involving multiple allegations of unlawful suspensions, discharges and unilateral changes by offering reinstatement and backpay to all discharged and striking workers and signing a new three-year collective bargaining agreement with its employees’ union, New England Health Care Employees Union District 1199, SEIU.

The settlement, which was reached midway through a hearing before an NLRB administrative law judge in Connecticut and approved by the judge yesterday, ends a long-running dispute which grew into a strike by almost 400 employees at four nursing homes in Connecticut operated by Spectrum Healthcare, LLC. Along with the contract and reinstatement of all employees, the company agreed to pay $545,000 in backpay and pension benefits to employees who were harmed by the unfair labor practices, and to expunge any disciplinary records related to the case. As a result, all NLRB charges against the company have been withdrawn. Spectrum admits to no wrongdoing in the settlement.

Complaints issued by the NLRB Regional Office in Hartford alleged that, beginning in the fall of 2009, several months after the prior collective bargaining agreement expired, Spectrum discharged seven employees and suspended three others to retaliate against their union activities and to discourage other employees from supporting the union. In addition, one employee was discharged and seven others were suspended after the employer unilaterally changed its tardiness discipline policy without first bargaining with the union.

The complaints further alleged that in April 2010, employees at the four nursing homes — in Derby, Ansonia, Winsted, and Hartford — went on strike to protest the unfair labor practices. When the strikers offered unconditionally to return to work in late August, the employer refused to take them back. Under federal labor law, if a strike is called because of an unfair labor practice, employees are entitled to reinstatement after an unconditional offer to return to work.

The reinstated employees are due to return to the facilities this week.

Therasense Makes Sense of Inequitable Conduct Defense

On May 25th, the Federal Circuit, sitting en banc, issued a decision reversing and remanded the district court’s holding that the patent-in-suit was invalid due to inequitable conduct. The patent remained invalid as anticipated, but the bar has been substantially raised for accused infringers attempting to prove the inequitable conduct defense – the “atomic bomb” of patent law, as Chief Judge Rader described it. With respect to the element of intent, the accused infringer must prove by clear and convincing evidence that the patentee acted with specific intent to deceive the PTO.

“The accused infringer must prove…that the applicant knew of the reference, knew that it was material, and made a deliberate decision to withhold it.” Intent can still be established by circumstantial evidence, but a high level of materiality cannot satisfy the burden to prove intent. Also, the evidence “must be sufficient to require a finding of deceitful intent in the light of all the circumstances….The absence of a good faith explanation for withholding a material reference does not, by itself, prove intent to deceive.”

The materiality element of inequitable conduct was adjusted by the majority as well. The court held that, except for a narrow exception for truly egregious acts of misconduct, like false Rule 132 affidavits, the materiality required is now but-for materiality. This but-for materiality is a stricter standard than that imposed by current Rule 56 and the accused infringer must now show that the claim would not have issued but for the omitted information. The court declined to give any deference to current Rule 56, finding that part 1 was deficient in not giving weight to rebuttal evidence of the prima facie case of obviousness established by the omitted art and that part 2 was deficient because, well, it was just too broad.

Interestingly, though not addressing the issue head-on, the court made it clear that inequitable conduct cannot be proven based on acts by patentee relating to claims they did not ultimately obtain:

“Because inequitable conduct renders an entire patent (or event a patent family) unenforceable, as a general rule, this doctrine should only be applied in instances where the patentee’s misconduct resulted in the unfair benefit of receiving an unwarranted claim… After all, the patentee obtains no advantage from misconduct if the patent would have issued anyway….enforcement of an otherwise valid patent does not injure the public merely because of misconduct, lurking somewhere in patent prosecution, that was immaterial to the patent’s issuance.”

Not just pretty words! Still, it is hard to see how this decision will deter applicants from sending in paper snow drifts of prior art. The minority made it clear that they felt that, even under these standards, the patent should be found unenforceable. Hal Wegner has noted that, for the disclosure burden to lighten on both applicants and the PTO, the PTO must respond proactively to this decision.

Prevailing Antitrust Defendants Recover $367,000 in e-Discovery Costs

Recently, prevailing antitrust defendants were awarded $367,000 in e-discovery costs incurred by their vendor. See Race Tires America v. Hoosier Racing Tire Corp., 2011 WL 1748620 (W.D. Pa. May 6, 2011). While the Court labeled the facts as “unique” and that its holding was limited, the Court’s opinion is very thorough and the facts may be familiar to many antitrust defendants.

In today’s age where the costs of e-discovery can run several hundred thousand dollars or more and outside vendors are routinely hired to help, this holding can be used as a shield and a sword. During discovery, a party can alert the other side that aggressive discovery requests and a demand for many electronic search terms is a major factor in awarding costs of e-discovery – if the responding party prevails. And, if a party should prevail, the potential for an award of the costs of e-discovery can be an additional bonus and/or leverage for any post-verdict resolution without appeal.

The facts are simple. Plaintiff Specialty Tires America (STA) brought antitrust claims against Hoosier Racing, its tire supplier competitor, and Dirt Motor Sports, Inc. d/b/a World Racing Group, a motorsports racing sanctioning body. STA claimed that a so-called “single tire rule” by various sanctioning bodies like Dirt Motor Sports, as well as the related exclusive supply contracts between some of these sanctioning bodies and Hoosier violated Section 1 and 2 of the Sherman Act and caused STA in excess of $80 million in damages. See Race Tires America v. Hoosier Racing Tire Corp., 614 F. 3d 57, 62-73 (3d Cir. 2010). The District Court granted summary judgment in favor of defendants finding that STA had failed to demonstrate antitrust injury, and the Third Circuit Court of Appeals affirmed. Id. at 83-84.

The normal rule that “costs — other than attorney’s fees — should be allowed to the prevailing party” (Fed. R. Civ. P. 54(d)(1)) creates a “strong presumption” that all costs authorized for payment will be awarded to the prevailing party, so long as the costs are enumerated in 28 U.S.C. § 1920, the general taxation-of-costs statute. As prevailing parties, the defendants each filed a Bill of Costs in which the majority of amounts requested were e-discovery costs. Plaintiff objected arguing that e-discovery costs were not taxable under 28 U.S.C. § 1920(4).
Section 1920(4) allows recovery of “[f]ees for exemplification and the costs of making copies … necessarily obtained for use in the case.” 28 U.S.C. § 1920(4). There are two statutory interpretation questions that have divided Courts. First, costs of electronic scanning of documents can be recoverable as “necessary” or unrecoverable as a mere “convenience.”

The other issue takes a few different forms, but focuses on whether the terms “exemplification” and “copying”, which originated in the world of paper, should be limited to physical preparation or rather updated to take into account changing technology and e-discovery. The Court discussed a litany of these cases. Some courts that have applied § 1920(4) to today’s e-discovery demands, have limited exemplification and copying to just the costs for scanning of documents, which is considered merely reproducing paper documents in electronic form, and refused to extend the statute to cover processing records, extracting data, and converting files. Courts are also divided on whether extracting, searching, and storing work by outside vendors are unrecoverable paralegal-like tasks, or whether such costs are recoverable because outside vendors provide highly technical and necessary services in the electronic age and which are not the type of services that paralegals are trained for or are capable of providing.

In this case, because the Court and the parties anticipated that discovery would be in the form of electronically stored information and because plaintiff aggressively pursued e-discovery (e.g., directing 273 discovery requests to one defendant and imposing over 442 search terms), defendants’ use of e-discovery vendors to retrieve and prepare e-discovery documents for production was recoverable as an indispensable part of the discovery process. The Court also found that the vendor’s fees were reasonable, especially because the costs were incurred by defendants when they did not know if they would prevail at trial.

The Court also denied the plaintiff’s request for a Special Master to assess the reasonableness of e-discovery costs incurred by the prevailing defendants as an unnecessary cost and delay.

Therasense Inc. v. Becton, Dickinson and Company—The Federal Circuit tightens the standards necessary to establish the inequitable conduct defense by requiring a “but-for” showing of materiality

In Therasense Inc. v. Becton, Dickinson and Co., Appeal No. 2008-1511(May 25, 2011), an en banc Federal Circuit issued a significant ruling on the elements necessary to establish an inequitable conduct defense. The stakes for a patent owner facing a charge of inequitable conduct are high: inequitable conduct renders the affected patent unenforceable and could support a finding that the case was exceptional, entitling the alleged infringer to attorneys fees. A party alleging inequitable conduct had to show that the patentee misrepresented or failed to disclose material information with an intent to deceive the Patent Office. The courts were then to engage in an equitable “balancing” of materiality and intent to determine whether the conduct justified finding the patents unenforceable.

While recent scholarship suggests that the defense was not particularly successful in cases that made their way to the Federal Circuit and that the Federal Circuit applied stricter standards as to the elements of the defense, the incentives to assert the defense were so great that patent litigators were alleging inequitable conduct as a matter of course. In fact, the defense of inequitable conduct was said to have been asserted in as many as 60 to 80 percent of patent infringement cases. Also, many believed that the standards for finding inequitable conduct elements had not been sufficiently articulated by the Federal Circuit.

In Therasense, a six-judge majority addressed those concerns by significantly tightening the standards to be used in assessing the materiality and intent elements. Most importantly, the majority held that in most circumstances the party asserting an inequitable conduct defense must establish that “but-for” the misrepresentation or omission, the patent would not have issued. Further, materiality and intent were held to be separate requirements and were no longer part of a sliding scale where a showing of greater materiality permitted a showing of lesser intent. The Federal Circuit did, however, recognize that in instances of egregious misconduct, a “but-for” showing would not be required.

The decision brings to a close an almost 30-year effort by the Federal Circuit to tighten up the standards for proving inequitable conduct which the Court had earlier described as “a plague” on the patent system. As a result, it was contributing to the massive citation of prior art to the PTO, which in turn contributed significantly to the backlog of patent applications. The use of the inequitable conduct defense was also said to haveFederal Circuit tightens the standards necessary to establish the inequitable conduct defense by requiring a “but-for” showing of materiality  several other negative effects, such as the potential to destroy parts of patent portfolios/families, inhibit the possibility of settlement and cast a cloud over the reputations of inventors and patent prosecutors. Indeed, the Federal Circuit prefaced its holding by stating that it “now tightens the standards for finding both intent and materiality in order to redirect [the inequitable conduct] doctrine that has been overused to the detriment of the public.” Slip Op. at 24.

The Federal Circuit created an exception to the “but-for” materiality holding in the case of “affirmative egregious misconduct.” Id. at 29. One example of such egregious misconduct would be the filing of an unmistakably false affidavit. The Federal Circuit pointed out that the egregious misconduct exception provided a measure of flexibility to capture extraordinary circumstances.

In the Therasense case, the alleged misconduct had been the failure to disclose briefs that the patent applicant had submitted to the European Patent Office regarding the European counterpart of a related patent owned by the patent applicant. The District Court had found the patent unenforceable due to this failure to disclose. The Federal Circuit reversed and remanded and instructed the District Court to determine whether the PTO would not have granted the patent but for the failure to disclose the European Patent Office briefs. The Court also vacated the District Court finding of intent to deceive because it had decided this issue under the wrong standard. The District Court was instructed to determine whether there was clear and convincing evidence demonstrating that the patent applicant knew of the European Patent Office briefs, knew of their materiality and made the conscious decision not to disclose them in order to deceive the PTO.

The four judge dissent stressed that the “but-for” test of materiality departed from Federal Circuit precedent and was inconsistent with the PTO’s standard set forth in PTO Rule 56. The majority opinion’s response to the dissent was that the PTO’s Rule 56 standard was one of the major causes of the rampant use of the inequitable conduct defense.

The Patent and Trademark Office was quick to react to the decision. On May 26, 2011 it announced that it was “carefully studying the important en banc decision by the U.S. Court of Appeals for the Federal Circuit in the case of Therasense v. Becton, Dickinson to assess how it may impact agency practices and procedures.The agency also announced that it expects to soon issue guidance to applicants related to the prior art and information they must disclose to the Office in view of Therasense.” As the press release noted, the Therasense “decision resolves uncertainties in many aspects of how district courts must apply the inequitable conduct doctrine.”

Interlocutory Appeal From Denial Of Twombly Motion to Dismiss in Text Messaging Antitrust Litigation

Judge Posner authored a unanimous opinion at the close of 2010 holding that a denial of a Rule 12(b)(6) motion to dismiss based on Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), raised a “controlling question of law” suitable for interlocutory appeal pursuant to 28 U.S.C. § 1292(b). In re Text Messaging Antitrust Litigation, 630 F.3d 622 (7th Cir. 2010) (based largely on the uncertainty surrounding the Twombly legal standard). The court then held that the district court had properly denied the motion to dismiss based onTwombly.

Text Messaging concerned consolidated class action proceedings accusing defendants of conspiring to fix prices for text messaging services. The district court denied a Twombly motion to dismiss and certified its ruling, at defendants’ request, for interlocutory appeal, stating that the application of Twombly remained unclear; that reasonable minds could differ on its application here; that the question was controlling because granting the motion to dismiss could terminate the case; and that immediate review would materially advance the ultimate conclusion of the case. Plaintiffs opposed certification for appeal in the district court, asserting that no controlling question of law was involved, and then asked the court of appeals to refuse the required permission for an interlocutory appeal.

Judge Posner found the appeal to concern a controlling question of law, which was the legal significance of the facts as alleged, rather than the resolution of disputed facts. A question of law under 1292(b) includes the “question of the meaning of a . . . common law doctrine . . .” 630 F.3d at 626. The legal standard set forth in Twombly was not settled, but instead had placed pleading standards “in ferment.” Thus, the case did not concern the “routine application[] of well-settled legal standards to facts alleged in a complaint . . .” (630 F.3d at 626), which would not meet the requirements for a Section 1292(b) interlocutory appeal. Instead, the “question requires the interpretation, and not merely the application, of a legal standard – that of Twombly.” 630 F.3d at 625.

Granting an appeal would promote the “main task of an appellate court, which is to maintain the coherence, uniformity and predictability of the law . . .” Id. In addition, concerns underlying the holding in Twomblysupported empowering the district court and court of appeal to authorize an interlocutory appeal. Twombly is “designed to spare defendants the expense of responding to bulky, burdensome discovery unless the complaint provides enough information to enable an inference that the suit has sufficient merit to warrant putting the defendant to the burden of responding to at least a limited discovery demand.” 630 F.3d at 625. Permitting a complex case of extremely dubious merit to proceed would place defendants in a “discovery swamp,” and create “unjustifiable harm to a defendant that only an immediate appeal can avert.” Id. at 626.

The court then held that “the complaint alleges a conspiracy with sufficient plausibility to satisfy the pleading standard of Twombly” (630 F.3d at 627), discussing, inter alia, the following types of allegations as supporting that result:

— “Parallel behavior of a type anomalous in a competitive market is thus a symptom of price fixing, though standing alone it is not proof of it; and an industry structure that facilitates collusion constitutes supporting evidence of collusion.” 630 F.3d at 627-628. “[D]efendants sell 90 percent of U.S. text messaging services, and it would not be difficult for such a small group to agree on prices and to be able to detect ‘cheating’ . . .” Id.

— “[T]he defendants belonged to a trade association and exchanged price information directly at association meetings. This allegation identifies a practice, not illegal in itself, that facilitates price fixing that would be difficult for the authorities to detect.” 630 F.3d at 628.

— “[I]n the face of steeply falling costs, the defendants increased their prices.” Id.

— “[A]ll at once the defendants changed their pricing structures, which were heterogeneous and complex, to a uniform pricing structure, and then simultaneously jacked up their prices by a third.” Id., citing Twombly, 550 U.S. at 557 n. 4.

— No “smoking gun” was alleged, nor need it be. The allegations in the complaint need not “compel an inference of conspiracy” since the test at the motion to dismiss stage is “plausibility.” The “plausibility standard is not akin to a probability requirement.” Text Messaging, 630 F.3d at 629 (court’s emphasis).

— “[T]he complaint must establish a nonnegligible probability that a claim is valid; but the probability need not be as great as such terms as ‘preponderance of the evidence’ connote.” Id.

In Judge Posner’s view, the district judge was right to rule that the complaint “provides a sufficiently plausible case of price fixing to warrant allowing the plaintiffs to proceed to discovery.” Id.

Therasense Returns Common Sense to Law of Inequitable Conduct

Yesterday, in Therasense, Inc. v. Becton, Dickinson and Company (Fed. Cir. 2011) (en banc), the Federal Circuit handed down an historic and much needed update to the law of inequitable conduct.  The en banc (6-1-4) decision markedly increased the requirement for proof of inequitable conduct:  “This court now tightens the standards for finding both intent and materiality in order to redirect a doctrine that has been overused to the detriment of the public.”  The court rejected the “sliding scale” approach that previously allowed intent to deceive to be inferred from strong materiality.  The new standard makes intent and materiality separate requirements, and forbids a court from inferring intent solely from a strong showing of materiality.   Now, evidence of deceitful intent must be weighed separately from materiality, and proven by clear and convincing evidence.  The clear and convincing standard requires that a finding of deceptive intent must be “single most reasonable inference able to be drawn from the evidence.”

In addition, the court raised the standards for proof of materiality, holding that “as a general matter, the materiality required to establish inequitable conduct is but-for materiality.”  But-for materiality requires that the PTO would not have allowed a claim had it been aware of the undisclosed prior art.

The following passages from majority opinion in Therasense set forth the heart of the decision:

Intent and materiality are separate requirements. Hoffmann-La Roche, Inc. v. Promega Corp., 323 F.3d 1354, 1359 (Fed. Cir. 2003). A district court should not use a “sliding scale,” where a weak showing of intent may be found sufficient based on a strong showing of materiality, and vice versa. Moreover, a district court may not infer intent solely from materiality. Instead, a court must weigh the evidence of intent to deceive independent of its analysis of materiality. Proving that the applicant knew of a reference, should have known of its materiality, and decided not to submit it to the PTO does not prove specific intent to deceive. See Star, 537 F.3d at 1366 (“the fact that information later found material was not disclosed cannot, by itself, satisfy the deceptive intent element of inequitable conduct”).

Because direct evidence of deceptive intent is rare, a district court may infer intent from indirect and circumstantial evidence. Larson Mfg. Co. of S.D., Inc. v. Aluminart Prods. Ltd., 559 F.3d 1317, 1340 (Fed. Cir. 2009). However, to meet the clear and convincing evidence standard, the specific intent to deceive must be “the single most reasonable inference able to be drawn from the evidence.” Star, 537 F.3d at 1366. Indeed, the evidence “must be sufficient to require a finding of deceitful intent in the light of all the circumstances.” Kingsdown, 863 F.2d at 873 (emphasis added). Hence, when there are multiple reasonable inferences that may be drawn, intent to deceive cannot be found. See Scanner Techs. Corp. v. ICOS Vision Sys. Corp., 528 F.3d 1365, 1376 (Fed. Cir. 2008) (“Whenever evidence proffered to show either materiality or intent is susceptible of multiple reasonable inferences, a district court clearly errs in overlooking one inference in favor of another equally reasonable inference.”). This court reviews the district court’s factual findings regarding what reasonable inferences may be drawn from the evidence for clear error. See Star, 537 F.3d at 1365.

This court holds that, as a general matter, the materiality required to establish inequitable conduct is but-for materiality. When an applicant fails to disclose prior art to the PTO, that prior art is but-for material if the PTO would not have allowed a claim had it been aware of the undisclosed prior art. Hence, in assessing the materiality of a withheld reference, the court must determine whether the PTO would have allowed the claim if it had been aware of the undisclosed reference. In making this patentability determination, the court should apply the preponderance of the evidence standard and give claims their broadest reasonable construction. See Manual of Patent Examining Procedure (“MPEP”) §§ 706, 2111 (8th ed. Rev. 8, July 2010). Often the patentability of a claim will be congruent with the validity determination—if a claim is properly invalidated in district court based on the deliberately withheld reference, then that reference is necessarily material because a finding of invalidity in a district court requires clear and convincing evidence, a higher evidentiary burden than that used in prosecution at the PTO. However, even if a district court does not invalidate a claim based on a deliberately withheld reference, the reference may be material if it would have blocked patent issuance under the PTO’s different evidentiary standards. See MPEP §§ 706 (preponderance of the evidence), 2111 (broadest reasonable construction).

As an equitable doctrine, inequitable conduct hinges on basic fairness. “[T]he remedy imposed by a court of equity should be commensurate with the violation.” Columbus Bd. of Educ. v. Penick, 443 U.S. 449, 465 (1979). Because inequitable conduct renders an entire patent (or even a patent family) unenforceable, as a general rule, this doctrine should only be applied in instances where the patentee’s misconduct resulted in the unfair benefit of receiving an unwarranted claim. See Star, 537 F.3d at 1366 (“[j]ust as it is inequitable to permit a patentee who obtained his patent through deliberate misrepresentations or omissions of material information to enforce the patent against others, it is also inequitable to strike down an entire patent where the patentee committed only minor missteps or acted with minimal culpability”). After all, the patentee obtains no advantage from misconduct if the patent would have issued anyway. See Keystone, 290 U.S. at 245 (“The equitable powers of the court can never be exerted in behalf of one . . . who by deceit or any unfair means has gained an advantage.”) (emphasis added) (internal citations omitted). Moreover, enforcement of an otherwise valid patent does not injure the public merely because of misconduct, lurking somewhere in patent prosecution, that was immaterial to the patent’s issuance.

Federal Circuit Ruling Tightens Standard For Inequitable Conduct

In patent litigation, a finding of inequitable conduct renders a patent unenforceable, exposes the patentee to an assessment of attorney’s fees, and has other significant consequences. The Federal Circuit has characterized the remedies from inequitable conduct as the “atomic bomb” of patent litigation. Therasense, Inc. v. Becton, Dickinson & Co., ___ F.3d ___, slip op. at 21 (Fed. Cir. May 25, 2011) (en banc). Yesterday, the Federal Circuit, sitting en banc, sought to limit the use of that weapon by tightening the standards for finding inequitable conduct. Under the new standard, to prevail on a claim for inequitable conduct, the alleged infringer must show “but-for” materiality and, by clear and convincing evidence, specific intent to deceive the United States Patent and Trademark Office (“PTO”).

The majority opinion was written by Chief Judge Rader and joined in full by Judges Newman, Lourie, Bryson, Linn, Moore, and Reyna; an opinion concurring in part and dissenting in part was rendered by Judge O’Malley; and a dissenting opinion was written by Judge Bryson and joined by Judges Gajarsa, Dyk, and Prost.

To establish intent to deceive for a failure to disclose a reference, “the accused infringer must prove by clear and convincing evidence that the applicant knew of the reference, knew that it was material, and made a deliberate decision to withhold it.” Slip op. at 24. Mere negligence, showing that the patentee “should have known” of the reference, is insufficient. Id. In most circumstances, where direct evidence if intent to deceive is lacking, “a district court may infer intent from indirect and circumstantial evidence.” The Federal Circuit clarified that materiality and intent are separate requirements and abandoned the “sliding scale” approach. Id. at 24–25. A court may not infer intent solely from materiality. Id. at 25. While the Court did not hold that materiality was irrelevant to intent, specific intent to deceive must be “the single most reasonable inference able to be drawn from the evidence.” Id.

The Court adopted a new standard for materiality required to establish inequitable conduct, “but-for materiality.” Slip op. at 27 (emphasis added). When prior art is withheld from the PTO, the prior art is but-for material if the PTO would not have allowed a claim had it been aware of the undisclosed prior art. In other words, prior art that invalidates a claim and was withheld from the PTO is material. This is substantially narrower that the past practice of deciding whether the reference had to be disclosed under PTO Rule 56, which had previously been the standard.

The new materiality test does not mean the claims will necessarily be invalidated based upon the undisclosed prior art. A district court must determine whether the PTO would have allowed the claim if it had been aware of the undisclosed prior art. Slip Op. at 28. Unlike the clear and convincing standard required to invalidate a claim in litigation, to determine whether the PTO would have allowed the claim had it been aware of the undisclosed prior art, the district court “should apply the preponderance of the evidence standard and give claims their broadest reasonable construction.” Id. Accordingly, there may be situations where the undisclosed prior art is insufficient to invalidate a claim during litigation, but it is otherwise “material” for purposes of inequitable conduct.

In addition to announcing a new standard for materiality, the Federal Circuit carved out an exception to the but-for materiality test. “When the patentee has engaged in affirmative acts of egregious misconduct, such as the filing of an unmistakably false affidavit, the misconduct is material.” Slip op. at 29.

The Federal Circuit expressly declined to adopt the definition of materiality set forth by the PTO in Rule 56. Slip op. at 32; but see Dissenting Op. at 3 (adopting Rule 56 definition of materiality). The Federal Circuit criticizes Rule 56 as too broad because inequitable conduct may be based on information that becomes irrelevant in view on subsequent arguments by the applicant to the PTO. Id. Nonetheless, as a practical matter, practitioners will continue to comply with the requirements of Rule 56 during prosecution.

The ruling will make it more difficult for an accused infringer to plead inequitable conduct with specificity as required by the Federal Rule of Civil Procedure 9(b). An accused infringer should now need to plead with specificity factual averments to show that the PTO would not have allowed a claim but-for non-disclosure of the prior art reference and that the applicant knew of the reference, knew that it was material, and made a deliberate decision to withhold it.

The facts and history of the case are summarized in an earlier alert which you can review at this link: Federal Circuit Agrees To Review Standard For Inequitable Conduct.

Court Throws Out Antitrust Claims Against Netflix

In an April 29, 2011 opinion, the District Court for the Northern District of California granted defendant Netflix’s summary judgment motion against a putative class of plaintiffs comprising of individuals who subscribed to Blockbuster, Inc.’s online DVD rental services. See Order Granting Motion for Summary Judgment, No. M-09-2029 PJH, Dkt. No. 376 (“Order”).

Plaintiffs made no conspiracy allegations against Blockbuster, which was their subscription provider. Instead, the multidistrict litigation stemmed from a May 19, 2005 marketing/promotion agreement between Netflix and Walmart, pursuant to which Walmart allegedly exited the market allowing Netflix to enhance its dominant position in the market for DVD rentals, and to eventually raise its subscription prices. Plaintiffs claimed that the reduced competition in the online DVD rental market allowed Blockbuster, which now operated in a two-firm market, to also raise its subscription prices for DVD rentals to plaintiffs. Order at 2.

Plaintiffs’ key allegations were that (1) Blockbuster entered the market in late 2004; (2) Netflix dropped the price of its 3-out subscription plan from $21.99 to $17.99 in October 2004, in response to Blockbuster’s entry and never raised that price; (3) in May 2005, defendants entered into their allegedly illegal “promotional agreement” pursuant to which Walmart subsequently exited the market; (4) Blockbuster was charging $14.99 for its subscription plan prior to the challenged “promotional agreement”; (5) according to a Blockbuster executive, the $14.99 price was “not sustainable”; (6) Blockbuster had begun testing the $17.99 price in connection with certain of its subscription programs in advance of defendants’ announcement of their allegedly unlawful agreement; and (7) in August 2005, three months after the promotional agreement was announced, Blockbuster raised its subscription price from $14.99 to $17.99, the price being charged by Netflix.

The court initially had granted a motion to dismiss with prejudice based on the indirectness of the alleged injury, speculative nature of the harm and complexity of apportioning damages. Id. at 3 (relying on Assoc. Gen. Contractors of Cal. v. Cal. State Council of Carpenters, 459 U.S. 519 (1983)). Later, however, the court reconsidered its prior order and granted plaintiffs leave to amend to allege a direct and proximate causal injury.

In denying a second motion to dismiss, the court noted that plaintiffs’ revised theory of causation differed from their original theory in that “it now focused on Netflix’s ability to convert a competitive price into a supracompetitive price by refusing to compete in an unrestrained market, as well as Blockbuster’s ‘reliance’ on Netflix pricing in setting its own pricing.” Id. at 5 (emphasis in original). Combined with a number of new allegations, the court held that this new theory of causation was sufficient to get plaintiffs past the pleading stage. Nonetheless, the court continued to express concern about plaintiffs’ ability to satisfy the direct injury requirement and encouraged the parties to bring early summary judgment motions directed specifically to antitrust standing. Id. at 5-6.

At the summary judgment stage, and after discovery on the antitrust standing issue had been completed, plaintiffs no longer alleged that Blockbuster’s August 2005 price increase was a direct response to Walmart’s exit from the market. Instead, they argued that, in the but-for world, Netflix would have lowered its price to a true competitive level, and that because Blockbuster’s price derived from Netflix’s, Blockbuster would have followed suit by lowering its price, resulting in lower prices as of August 2005. The court determined that the only issue before it was, assuming Netflix would have lowered its price to the level alleged by plaintiffs, would Blockbuster “track” or “match” Netflix’s pricing.

Among other facts, evidence showed that Blockbuster believed that Netflix “defined” the maximum market price as early as 2003; that Blockbuster used Netflix’s then prevailing price as a baseline in setting its prices; that Blockbuster would not, and indeed did not, exceed Netflix’s pricing; and that each time Netflix cut prices, Blockbuster responded by cutting its price to undercut Netflix. Based on these facts, plaintiffs argued that had Netflix lowered its price below $17.99, Blockbuster would have followed and at least matched Netflix’s price. Id. at 9-10.

However, evidence also showed that Blockbuster considered a variety of factors in setting its prices, besides the price charged by Netflix, including its own financial condition, costs, price testing, product usage and research. Evidence also showed that, although Blockbuster had lowered its prices to compete with Netflix, its price of $14.99 was “temporary” and deemed “not sustainable”; that it believed it had “inferior services” compared to its rival; and that it had already begun a program of raising its prices to $17.99 for some subscriptions before defendants’ promotional agreement was announced. Id. at 10-11.

Concluding that there was no genuine issue of material fact present and that the only dispute was as to the legal effect to be given the undisputed facts, the court granted Netflix’s motion. Id. at 15. The court held that, even viewing all facts in the light most favorable to plaintiffs, they had failed to demonstrate that Netflix pricing truly set Blockbuster’s pricing “as a function of any interdependent market interaction, as opposed to simply a likely function of competitive dynamics of the market.” Id. at 14. At best, the court explained, “plaintiffs demonstrate only that Blockbuster pricing was set with reference to Netflix pricing. But, there is nothing to indicate that Blockbuster pricing – or its price increase in August 2005 – was in any way directly influenced or impacted by Netflix’s alleged anticompetitive conduct . . . .” Id. at 14-15 (emphasis in original).

In Pineda’s Wake: Constraints on Song-Beverly Class Action Litigation

In the wake of Pineda v. Williams-Sonoma Stores, Inc. (2011) 51 Cal. 4th 524 (“Pineda“), Divisions One and Five of California’s Second Appellate District have published two opinions that put some constraints on Song-Beverly class action litigation.

The first case is Archer v. United Rentals, Inc. (May 19, 2011, B219089) __ Cal.App.4th ___, [2011 BL 134609, 2011 DJDAR 7158]. In Archer, the trial court (Anthony J. Mohr, J.) awarded summary adjudication to the defendants on plaintiffs’ claim under the UCL, finding that plaintiffs’ lacked standing to proceed “because they did not lose money or property.” After a thorough discussion of the California Supreme Court’s recent decision in Kwikset Corp. v. Superior Court (2011) 51 Cal. 4th 310 (“Kwikset“), Division One ruled that plaintiffs “have failed to demonstrate” how the alleged invasion of privacy “translates into a loss of money or property.” The trial court’s summary adjudication was affirmed. Archer v. United Rentals, Inc. (May 19, 2011, B219089) __ Cal.App.4th ___, [2011 BL 134609, 2011 DJDAR 7158] slip op. at p. 8.

Judge Mohr also denied class certification of Mr. Archer’s claims brought under the Song-Beverly Credit Card Act (“SBCCA”) and the Consumer Legal Remedies Act (“CLRA”). He reasoned that the SBCCA does not apply to business credit cards or personal credit cards used primarily for business purposes. On this basis, he found that determining class membership would be an “intensely fact-driven” and costly process that was not justified. His denial of class certification was based on the ascertainability requirement. See Sevidal v. Target Corp. (2010) 189 Cal App. 4th 905, 919; Sav-On Drug Stores, Inc. v. Superior Court (2004) 34 Cal. 4th 319, 326.

Division One agreed, in part, with Judge Mohr. The Appellate Court held that “section 1747.08 does not apply to credit cards issued for business purposes,” but it does apply to a natural person to whom a credit card isissued for consumer credit purposes “without regard to the actual purpose for which the card is used, namely, business or otherwise.” Archer, slip op. at p. 18. Relying upon the definition of “cardholder” in section 1747.02(d) and certain legislative history, the Court held that “credit cards issued for business purposes are excluded from the privacy protection afforded under section 1747.08.” Id. at p. 17. However, because 1747.02(d) focuses on the purpose for which the card was “issued,” as opposed to “used,” the Appellate Court found that section 1747.08 applies to consumers who are issued credit cards for consumer credit purposes without regard to the purpose for which the card is actually used.

Division One reversed the order denying class certification and remanded the matter to the trial court to conduct further proceedings on the question of whether a class of personal credit card holders could be ascertained, and thus certified. (The Court noted that the parties’ treated the CLRA and SBCCA claims as the same in the context of the appeal and did not address any additional issues related to the CLRA claim.)

In sum, the Archer opinion impacts the size of putative classes under Song-Beverly. It stands for the proposition that putative classes under Song-Beverly cannot include consumers who used credit cards that were issued for business purposes. Further, it confirms that UCL claims in the context of Song-Beverly violations are subject to summary adjudication, under Proposition 64’s standing requirement that a plaintiff show “injury in fact” through the loss of money or property.

The second case, Folgelstrom v. Lamps Plus, Inc., involved an appeal based on a judgment that was entered after demurrers to the plaintiff’s SBCCA, invasion of privacy, and UCL claims were sustained by the trial court (Anthony J. Mohr, J.), without leave to amend. Division Five reversed Judge Mohr as to the Song-Beverly claim, in light of Pineda (the complaint alleged requests for zip codes). However, the Appellate Court affirmed the judgment as to the invasion of privacy and UCL claims. Folgelstrom v. Lamps Plus, Inc. (May 20, 2011, B221376) ___ Cal. App.4th ___, [2011 WL 1902202, 2011 DJDAR 7276].

With reference to the constitutional invasion of privacy claim, Division Five was not convinced that plaintiff had alleged facts demonstrating a protected privacy interest in his home address. But in any event, plaintiff had not alleged facts showing a “serious” invasion of privacy. Allegations that the retailer had obtained plaintiff’s address without his knowledge or permission, and mailed him coupons or other advertisements, is not “an egregious breach of social norms, but routine commercial behavior.” Folgelstrom, slip op. at pp. 5-6.

In addressing the common law tort of invasion of privacy, Division Five looked to § 652B of the Restatement Second of Torts, which has been adopted in California. The Court determine that the intrusion as well as the use of the information obtained from the plaintiff must be “highly offensive.” No facts were alleged showing any offensive or improper use. The Court dismissed the plaintiff’s argument that he was subject to an increased risk of identity theft.

As in Archer, the Folgelstrom Court found that the UCL claim failed underKwikset and Proposition 64’s requirement that the plaintiff suffer economic injury in fact and loss of money or property. The Court rejected the plaintiff’s novel arguments that he had lost intellectual property rights in his home address and that he failed to demonstrate that he suffered any economic injury, lost money, or lost property.

Thus, within the span of a few days, the Second District Court of Appeal has published two important Song-Beverly decisions that put the brakes on attempts to over-plead cases involving requests for personal information from credit card customers.

Patent Owner Stay Motion Successful Based on Defendants’ Reexam Requests Filed on Eve of Markman

In Fifth Market, Inc. v. CME Group Inc, et al., (1-08-cv-00520, D. Del), the Patent Owner/Plaintiff (Fifth Market, Inc.) sued multiple Defendants on two patents (U.S. Pat. No. 6,418,419 and U.S. Pat. No. 7,024,387) in 2008.  Three amended complaints were subsequently filed, the last one on January 10, 2011.  The Defendants answered on February 7, 2011, asserting affirmative defenses and counterclaims to the thir amended complaint.  A Markman hearing was held on April 5, 2011 and on April 21, Patent Owner/Plaintiff filed a motion to stay pending reexaminations.  According to the Court’s order, the timing of events was this:

  • March 28 – Defendants’ counsel, Banner & Witcoff, files an ex parte reexamination request of the ’419 patent
  • April 1 – Defendants’ counsel, Brinks Hofer Gibson & Lione, files an ex parte reexamination request of the ’419 patent
  • April  4 – Plaintiff discloses that Defendant provided it a copy of a request for ex parte reexamination of the ’419 patent filed on April 1, 2011 by Defendants’ counsel Brinks Hofer Gibson & Lione; Plaintiff also discloses that it received a copy of a draft request for ex parte reexamination of the ’387 patent (and that Defendants informed Plaintiff that it would be filed by Defendants).
  • April 5 – Markman Hearing
  • April 15 – Plaintiff received a copy of the second ex parte reexamination request for the ’419 patent from Defendants’ counsel, Banner & Witcoff, that had been filed on March 28, 2011.
  • April 21 – Motion to Stay by Patent Owner/Plaintiff

The motion to stay was opposed by the Defendants; however, the motion was ultimately granted by Chief District Judge Sleet after the traditional three factor test was applied (state of discovery, whether a stay will simplify issues, and prejudice to nonmoving party).  The Order for the stay stated:

The court understands the plaintiff’s concern about the defendants’ timing and tactics.  The facts and procedural history of this case are interesting.

In particular, the Court found:

  • prior to the Markman hearing, Defendants had already filed two separate requests for reexamination of the ’419 patent and were “contemplating filing” a reexamination request of the ’387 patent;
  • no persuasive evidence of undue prejudice or clear tactical disadvantage to Defendants;
  • that the stay would simplify the issues in the case;
  • that both patents-in-suit may be before the Patent Office, and that numerous prior art challenges in the requests will simplify issues for the court for any claims that survive and streamline the litigation;
  • that although the trial date of March 26, 2012 was indeed set, discovery is not yet complete; and
  • that Plaintiff timely filed its motion within weeks of learning about the reexamination requests.

What is not clear from the record is why the reexamination request of March 28 was not known or served on Plaintiff sooner than April 15.  And the record shows that the reexamination request filed on April 1 was actually filed electronically on April 2, and was accorded an April 29 filing date due to a defect in the filing.  Regardless, this case shows yet another example of the fact-dependent analysis involved in decisions to stay litigation pending reexamination.

The California Court of Appeal Again Chips Away at In re Tobacco II

Knapp v. AT&T Wireless Services, Inc. (Case No. G043744, May 20, 2011) __Cal.App.4th__, is the latest in a line of recent class action cases limiting the scope of In re Tobacco II Cases (2009) 46 Cal.4th 298. In Tobacco II, the California Supreme Court held that a named plaintiff in a putative class action must have suffered injury-in-fact to bring a claim for violation under the fraud prong of California’s Unfair Competition Law (the “UCL”), but that the named plaintiff need not show actual injury to unnamed class members. The court in Knapp held that Tobacco II applies only to standing, and not commonality, which requires a separate analysis. For this reason, the Fourth Appellate District upheld the trial court’s order denying plaintiff’s motion for class certification, finding that because AT&T Wireless did not make uniform representations to proposed class members, common issues of law did not predominate over individual issues and a class should not be certified under the UCL.

Julia Knapp subscribed to AT&T Wireless’ cell phone service. She claimed that AT&T Wireless fraudulently misrepresented and failed to disclose that it rounded up a customer’s partial airtime minutes to full minutes when calculating customers’ monthly minute totals. She claimed she suffered actual injury from this practice and, in a putative class action, sued for violations of the UCL and California’s Consumers Legal Remedies Act (CLRA), as well as common-law fraud. She then moved to certify a class, in part on the basis that her claims were common among the proposed class.

AT&T Wireless opposed the motion, arguing that the alleged misrepresentations were not uniformly made to proposed class members — some representations were oral with sales representatives either over the telephone or in person, while AT&T made many other relevant representations about the cell phone service in various advertisements, including radio, television, print and direct mailings.

Plaintiff argued that Tobacco II prohibited such individual inquiries. The Court of Appeal in Knapp, however, disagreed. “We see no language in Tobacco II that suggests to us that the Supreme Court intended our state’s trial courts to dispatch with an examination of commonality when addressing a motion for class certification.” The Knapp court found that Tobacco II was “irrelevant because the issue of ‘standing’ simply is not the same thing as the issue of ‘commonality.'” For these reasons, the Court of Appeal affirmed the decision of the trial court finding a lack of commonality and denying the motion to certify the class.
This decision is the latest in a growing line of Court of Appeal decisions to circumscribe Tobacco II’s apparent prohibition on inquiring into the standing of individual members of a putative class under the fraud prong of the UCL. Several courts have now drawn sharp distinctions between analyzing the standing of absent class members–rejected by the Tobacco II court–and analyzing the circumstances of absent class members cases for the purposes of analyzing common issues for class certification. Drawing on recent decisions in Cohen v. DIRECTV, Inc. (2009) 178 Cal.App.4th 966, Kaldenbach v. Mutual of Omaha Life Ins. Co. (2009) 178 Cal.App.4th 830, 843 and Pfizer v. Superior Court (2010) 182 Cal.App.4th 622, the Knapp court concluded that Tobacco II “does not affect our analysis as to commonality.”

IP Experience in the Due Diligence Process More Important than Ever

The Federal Circuit has recently denied Abraxis Bioscience, Inc.’s (“Abraxis”) bid for panel rehearing and rehearing en banc in its dispute with Navinta LLC (“Navinta”).1 The decision of the Court to deny rehearing in any form is important because the denial leaves unchanged the Court’s decision from November 2010 regarding patent assignments.

The Federal Circuit’s decision in Abraxis Bioscience, Inc. v. Navinta LLC in November 2010 dismissed Abraxis’ claim for lack of standing after Navinta appealed a district court’s judgment of direct and indirect infringement of Abraxis patents directed toward pain management drug products.2 On appeal, the Federal Circuit dismissed the case without prejudice and vacated the district court’s decision based on Abraxis’ lack of standing. The Federal Circuit held that, as a matter of federal law, Abraxis lacked standing because it did not have legal title to the patents at the time the suit was brought.

Abraxis acquired title to the patents through a multitiered trail of assignments that began with an Asset Purchase Agreement between Abraxis and AstraZeneca. The two parties ultimately assembled and executed the assignments properly to convey the rights in the asserted patents from the original inventor and assignee to Abraxis, but this did not occur, said the Federal Circuit, until after the patent infringement suit had been filed.

The Federal Circuit carefully analyzed the specific language of the assignment documents and stated that, despite state law allowing transactions to be given legally binding retroactive effect, the after-suit assignment did not give Abraxis the legal title required for standing to bring a patent infringement suit. The opinion stated, “[A]lthough state law governs the interpretation of contracts generally…the question of whether a patent assignment clause creates an automatic assignment or merely an obligation to assign is intimately bound up with the question of standing in patent cases. We have accordingly treated it as a matter of federal law.”3

The Federal Court’s decision hinged on the language of the Asset Purchase Agreement, which stated that AstraZeneca “shall, or shall cause” the transfer of the patent rights to Abraxis. This language created only an expectancy interest and not an actual transfer until the subsequent assignment documents were executed. The Federal Circuit’s decision is reminiscent of parts of the chain-of-title dispute that is currently under review by the U.S. Supreme Court in Bd. of Trs. of Leland Standford Junior Univ. v. Roche Molecular Sys., Inc.4

The bottom line considering this and previous Federal Circuit holdings is that there are unique situations to the transfer of patents that are governed by the law of the Federal Circuit and not state law. For this reason, an experienced IP attorney should be intimately involved in transactions that involve the transfer of patent rights.

Implementing Effective Litigation Holds

Does your company have an established procedure for issuing timely litigation holds?  Recent court decisions make it clear that employers have a duty to preserve electronically stored information and paper documents they know or should know would be relevant to a current or threatened legal action.  The consequences for failing to do so can be severe.  Events which trigger an employer’s duty to preserve information/documents include, but are not limited to, the following:

  • Receiving notice that the employer is a party to a legal or an administrative proceeding, such as a charge of discrimination;
  • Receiving a letter threatening a claim on behalf of an applicant or current or former employee;
  • A verbal demand from an applicant or current or former employee relating to a legal claim;
  • Other “red flags” exist or a “totality of circumstances” indicate a claim is likely to be made by an  applicant or current or former employee.

A litigation hold notice is best made in writing,  It should instruct recipients to preserve and not destroy (or overwrite) electronically stored information and paper documents that are relevant to current or threatened litigation.

Although the litigation hold notice must be tailored to the facts of each particular situation, at a minimum, it should include the following:

  • Name of the matter or individual involved;
  • Warning of the importance of the hold and the consequences for not complying with it;
  • Direction not to alter or destroy information/documents;
  • Reason for the hold – e.g., legal action;
  • Reason the recipient (see below) is getting the hold notice;
  • Types of information included in the hold and the applicable time period.  (Information subject to the hold could include personnel files and other employment related documents, e-mail and other forms of correspondence and electronically stored information.)
  • Instructions for preserving information/documents;
  • Suspension of any routine document retention/destruction policy;

The hold notice should be issued to all employees reasonably likely to have information relevant to a claim – the “key players” in the matter.  There could also be instances in which outside vendors would also need to be issued a hold notice.

The employer’s IT department should help implement litigation holds, particularly with regard to documents housed or stored in e-mail accounts, or on computers, cell phones PDAs, or on flash drives, as well as with regard to taking control of backup tapes and stopping any automatic overwriting of electronic data.

Finally, employers should enforce litigation holds and, if a violation of the hold is discovered, take prompt action to remedy the violation if possible.  Steps also should be taken to ensure no further violations occur, such as taking disciplinary action up to termination.

Litigation hold notices must be tailored to the facts of each case and should be reviewed by counsel knowledgeable in this area.  If you have a question about litigation hold practices, The Prince Firm attorneys are experienced in minimizing legal risks through the effective use of litigation holds and are available to assist employers with any of their needs.

Complaint Issued Against New York Nonprofit for Unlawfully Discharging Employees Following Facebook Posts

The National Labor Relations Board has issued a complaint alleging that Hispanics United of Buffalo, a nonprofit that provides social services to low-income clients, unlawfully discharged five employees after they took to Facebook to criticize working conditions, including work load and staffing issues. The complaint was issued May 9 by Rhonda Ley, NLRB Regional Director in Buffalo, New York.

The case involves an employee who, in advance of a meeting with management about working conditions, posted to her Facebook page a coworker’s allegation that employees did not do enough to help the organization’s clients.  The initial post generated responses from other employees who defended their job performance and criticized working conditions, including work load and staffing issues. After learning of the posts, Hispanics United discharged the five employees who participated, claiming that their comments constituted harassment of the employee originally mentioned in the post.

The complaint alleges that the Facebook discussion was protected concerted activity within the meaning of Section 7 of the National Labor Relations Act, because it involved a conversation among coworkers about their terms and conditions of employment, including their job performance and staffing levels.  Unless the case is settled, the complaint will be the subject of a hearing before an administrative law judge on June 22, 2011, in the Buffalo office of the NLRB.

Texas Egg Producer to Pay $1.9 Million Penalty to Resolve Clean Water Act Violations

WASHINGTON – The U.S. Environmental Protection Agency (EPA) and the U.S. Justice Department (DOJ) today announced that Mahard Egg Farm, Inc., a Texas corporation, will pay a $1.9 million penalty to resolve claims that the company violated the Clean Water Act (CWA) at its egg production facilities in Texas and Oklahoma. The civil penalty is the largest amount to be paid in a federal enforcement action involving a concentrated animal feeding operation (CAFO). The company will also spend approximately $3.5 million on remedial measures to ensure compliance with the law and protect the environment and people’s health.

“By working with DOJ and our state partners in Texas and Oklahoma, we have reached a significant settlement that reflects the seriousness of Mahard’s violations,” said Cynthia Giles, assistant administrator for EPA’s Office of Enforcement and Compliance Assurance. “Large animal feeding operations that fail to comply with our nation’s environmental laws threaten public health and the environment and put smaller farming operations at a disadvantage.”

“This agreement is the result of extensive cooperation between the states of Texas and Oklahoma and the federal government to address multiple violations of the Clean Water Act at Mahard facilities,” said Ignacia S. Moreno, assistant attorney general for the Environment and Natural Resources Division at the Department of Justice. “Ensuring the lawful handling of CAFO wastes will mean cleaner steams and waterways in Texas and Oklahoma, which is important for aquatic habitats, safe drinking water, and public recreation.”

The CWA complaint, filed jointly with the settlement by the United States and the states of Texas and Oklahoma, alleges that Mahard operated a facility without a permit and discharged pollutants into area waterways. Mahard also allegedly discharged pollutants or otherwise failed to comply with the terms of its permits at six other facilities, including its newest facility near Vernon, Texas, where it also failed to comply with the Texas Construction Storm Water Permit and to ensure safe drinking water for its employees. The states of Texas and Oklahoma also alleged violations of state laws.

Most egg production facilities generate various wastes, including wet or dry manure from chicken houses, wastewater from the egg-washing process, and compost from chicken carcasses. If done properly, these wastes may be sold or contained on-site in manure storage lagoons, prior to being applied to nearby fields. However, the joint complaint alleges that, as a result of Mahard’s historic practice of over-applying waste to its fields, the soils at its facilities are saturated with nutrients (nitrogen and phosphorus) and, during and after rainfall, these nutrients are discharged into area streams and waterways. In addition, at several facilities, Mahard abandoned inactive and improperly designed manure lagoons rather than closing them as required by law.

As part of this settlement, Mahard has committed to comprehensive, system-wide changes in order to bring each of its seven CAFO facilities into compliance with applicable state and federal laws, permits, and regulations and to restore the lands to prevent future discharges to area waterways. The settlement mandates the performance of specific requirements, such as lagoon closures, groundwater monitoring, and the construction and maintenance of buffer strips along area waterways within the facility boundaries. It also requires on-going land restoration and management measures, such as restrictions on land-application of manure and livestock grazing.

Preventing animal waste from contaminating surface and ground waters of the United States is one of EPA’s National Enforcement Initiatives for 2011-2013. The initiative continues EPA’s focus on large and medium sized CAFOs that are discharging pollution without or in violation of a permit.

The settlement, lodged in the U.S. District Court for the Northern District of Texas, is subject to a 30-day public comment period and approval by the federal court.

More information on the settlement: http://www.epa.gov/compliance/resources/cases/civil/cwa/mahardegg.html

Judge orders payment of $347,000 in back wages and penalties, 3-year debarment of Global Horizons from H-2A agricultural program

Case involves Thai workers employed in Hawaii, is second involving Los Angeles company

SAN FRANCISCO — The U.S. Department of Labor has obtained a judgment requiring Los Angeles-based Global Horizons Inc. and president Mordechai Orian to pay $153,000 in back wages to 88 temporary agricultural workers from Thailand employed in Hawaii, plus $194,000 in civil money penalties, for committing significant violations of the federal H-2A temporary nonimmigrant agricultural laborer program. Administrative Law Judge William Dorsey found Global Horizons and Orian jointly and severally liable for 11 categories of violations, warranting back wage payments, penalty assessments and a mandatory three-year debarment from participation in the H-2A program.

“It’s appropriate that Global Horizons and its owner are barred from employing H-2A workers for the next three years,” said Secretary of Labor Hilda L. Solis. “These workers left their families and homes with the expectation that they would be treated fairly and paid properly. Instead, Global Horizons violated multiple rules under the H-2A program designed to protect both domestic and foreign workers, and provide a level playing field for all agricultural employers.”

Investigations conducted by local offices of the department’s Wage and Hour Division‘s Western Region found that the defendants failed to pay employees for all hours worked and to pay the correct hourly wage rate; impermissibly withheld federal income tax and made illegal deductions from workers’ wages for meals and other basic living expenses; charged workers for housing-related expenses such as water, electricity and sewage; failed to pay workers for their transportation and subsistence costs; retaliated against workers who rightfully complained about their pay; failed to maintain required payroll records and produce them upon the division’s request; and illegally solicited agreements from workers to waive their rights and decrease their wages.

Dorsey determined that Global Horizons and Orian engaged in a pattern of activity that caused significant injury to the H-2A workers concerning their wages, benefits and working conditions, and ordered the three-year debarment.

The debarment ordered by Dorsey follows a Dec. 21, 2010, ruling by the Labor Department’s Administrative Review Board affirming a $199,600 judgment against both Global Horizons and Orian in a California H-2A case. The board found that Global Horizons and Orian gave preferential treatment to H-2A workers over U.S. workers and committed many of the same violations as in the Hawaii case. The department’s San Francisco Regional Solicitor’s Office litigated both of these cases.

For more information about enforcement under the H-2A temporary worker program, call the Wage and Hour Division’s toll-free helpline at 866-4US-WAGE (487-9243). Information is also available on the Internet at http://www.dol.gov/whd/.